How Do Financing Constraints Affect Firms' Equity Volatility?
65 Pages Posted: 1 Mar 2014 Last revised: 29 Aug 2017
Date Written: April 10, 2017
Theory suggests that financing frictions can have significant implications for firms’ equity volatility by shaping their exposure to economic risks. This paper provides evidence that an important determinant of higher equity volatility among R&D-intensive firms is fewer financing constraints on firms’ ability to access growth options. I provide evidence for this effect by studying how persistent shocks to the value of firms’ tangible assets (real estate) affect their subsequent equity volatility. The analysis addresses concerns about the identification of these balance sheet effects and shows that these effects are consistent with broader patterns on the equity volatility of R&D-intensive firms.
Keywords: Firm Equity Volatility, Growth Options, Financing Frictions
JEL Classification: G30, G32
Suggested Citation: Suggested Citation